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REC bonds offer good yields – INVEST

05 Sep

Rural Electrification Corporation Limited will open its public issue of Tax Free Secured Redeemable Non Convertible Bonds of face-value of  1,000 each in the nature of debentures having tax benefits under section 10(15)(iv)(h) of the Income Tax Act, 1961, as amended not exceeding  3500 Crore. Allotments will be on a First Come First Serve Basis.
The issue has 3 investment options – 8.26% p.a. (10 Yrs), 8.71% p.a. (15 Yrs) and 8.62% p.a. (20 Yrs) for investments upto and including  10 Lakhs and 8.01% p.a. (10 Yrs), 8.46% p.a. (15 Yrs) and 8.37% p.a. (20 Yrs) for investments above  10 Lakhs. The Issue opens for subscription on August 30, 2013.
The bonds have been rated ‘CRISIL AAA/Stable’ by CRISIL, ‘CARE AAA’ by CARE, ‘IND AAA’ by IRRPL and ‘[ICRA] AAA’ by ICRA. The above ratings indicate highest degree of safety for timely servicing of financial obligations

Company Highlights:

  Public financial institution in the Indian power infrastructure sector, engaged in financing and promotion of transmission, distribution and generation including renewable energy projects throughout India
  Occupies a key position in the GoI’s plans for the growth of the Indian power sector
  Granted “Navratna” status by the Department of Public Enterprise by virtue of the operational efficiency and financial strength

 

If you are in the higher tax bracket (20 or 30 per cent) and looking to lock into attractive rates for 10 years or more, the tax-free bonds being issued by Rural Electrification Corporation (REC) are a good option.
The yields on tax-free bonds are linked to those on government securities (G-secs). The yield on the 10-year G-sec has risen sharply and is now 8.6 per cent, close to the highs seen during the financial crisis of 2008. There is a good chance that these yields will moderate. So, it is a good time to lock into the tax-free bonds on offer now.
REC, a government-controlled lender, is offering retail investors (those who invest Rs 10 lakh or less) attractive rates — 8.26 per cent annually on 10-year bonds, 8.71 per cent for 15-year, and 8.62 per cent on 20-year instruments. For other investors, the rate of interest is 0.25 percentage points lower.

The interest will be paid out on December 1 every year and is not subject to tax. Investors in the higher tax brackets can earn higher interest from these bonds than from bank deposits, after accounting for taxes.
The best rate being offered on five-year bank deposits is 9.5 per cent, which compounded quarterly works out to 9.84 per cent. But investors paying 20 per cent tax will get a return of 7.82 per cent after tax and those in the 30-per-cent bracket will receive only 6.8 per cent. This is lower than what REC’s tax-free bonds are offering.

If you can invest for the long-term, consider the 15-year bonds for the best rate.
But buy the REC bonds after setting aside funds for investing in public provident fund (PPF). In addition to healthy tax-free returns (8.7 per cent currently), PPF offers tax deduction on the initial investment up to Rs 1 lakh.

 

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Posted by on September 5, 2013 in Uncategorized

 

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